DEBT…Just the sound of it causes a person's blood pressure to rise. Unfortunately, Americans have more of it than any other country in the world. Once you have it, it seems almost impossible to get rid of. The great news is, as a veteran or military service member, you’re awarded one of the best possible tools to help you eliminate your debt quicker…a VA Debt Consolidation loan. However beneficial a debt consolidation may be, it's only one part of successful debt reduction strategies.
By using the equity in your home, and let’s face it, it’s not doing anything for you while it sits there, you can tap into one of the greatest debt consolidation resources available. However, in order to benefit the most from a VA Debt Consolidation loan, there are 3 simple rules you must follow:
1. Have a Proven Debt Reduction Strategy
Like anything, to be successful, you must start with a good plan. There are many different ways to tackle debt. Each method approaches debt consolidation in different manners which means each will have different results. Only one may not be the right one for you. You may find combining a couple methods together will have a better impact. Provided is a Debt Consolidation Worksheet with each method explained. Use this worksheet to determine which method is the right one for you.
Two proven strategies to debt reduction are:
Snowball Debt Reduction
In this method of debt consolidation, you will pay down the debt with the lowest balance first. Generally this means the debt with the lowest payment as well. This is why it’s called the snowball effect. It starts small and works its way into huge savings. As each debt gets paid off, your monthly savings grows exponentially.
Avalanche Debt Reduction
This method tackles the highest interest rates first as they often cause the most long term financial problems. This solution could pose more difficulty though as often times the greater the interest rate, the higher the payment. The higher the payment, the more difficult it is to pay towards the principal of the loan. Should you find a solution that yields you a significant amount of money each month, like a VA debt consolidation loan, you’ll see the greatest returns off of this method.
You may choose to combine both of these methods as well. Maybe you decide to tackle the first 2 credit cards with smaller balances and use that savings to attack a credit card with a higher interest rate than let’s say, your car loan, even though the payment is higher on the credit card. By using the snowball method first, you relieve yourself of a couple payments which allows you more ability to pay down on the higher interest rate card. So your long term benefits come from your short term gains.
Snowflake Debt Reduction
Some of us don’t have the opportunity to generate extra income each month or improve our monthly cash flow as you would by refinancing. Even though you may not have a tremendous amount of money to spare each month to put towards your credit card balances or other loans, sometimes the smallest amounts add up. This is the theory behind Snowflake debt reduction.
Whether it be change from your trip to the store or drive thru restaurant, we all have spare change each month. Use this money to pay down on your credit debt. Even $2.50 put aside each week adds up to $130 that you could pay down on your smallest credit card by the end of the year. Do this and watch your spending habits and you will be surprised how much you have to apply toward the balances on your debt.
2. Determine how to implement the chosen Debt Consolidation Strategy and DO IT!
Simply paying off debts according to the proven methods isn’t enough. You need to determine what is the best way to implement the strategy. This is the only way to to eliminate ALL of your debt the quickest. For instance, you may get a debt consolidation line of credit offer in the mail but it may only pay off one or two of your debts. While that may lower your interest rate and save you a little money each month, it may not give you the fire power you need to blast away at your other debts. So in the end, you may have just traded a couple debts for one singularly larger debt with minimal gains.
Using a VA Debt Consolidation loan allows you to tap into a greater resource and eliminate multiple debts to be able to manage ALL of your other debt more easily. One mistake many make is to separate your debt into categories. Too many people only see car loans, credit card debt and a mortgage, trying hard to keep their credit cards and car loans separate from their mortgage. What many have forgotten is…all of this is…DEBT.
Whether you have five credit cards with a total balance of $20,000 and a home loan of $200,000, you still have $220,000 worth of debt. Some may say that using your home equity to pay off credit card debt is not wise. As long as mortgage interest is tax deductible and credit card interest is not, it’s hard to argue the benefit of consolidation through a home refinance…especially when you can gain some major monthly savings to apply one of the proven debt reduction strategies.
3. Stay on course with your debt consolidation goals and learn to be Frugal
Far too often we fall back into old patterns and nowhere is this more relevant than our spending habits. Learn to be frugal with your spending and make sure you follow the debt consolidation method(s). They only work if you properly utilize them.
3d Stress Concept (word Cloud) image courtesy of David Castillo Dominici / FreeDigitalPhotos.net
Additional Debt reduction resources: